The Behavioral Economics of Currency Unions: Economic Integration and Monetary Policy

Akvile Bertasiute, Domenico Massaro and Matthias Weber

No 1916, Working Papers on Finance from University of St. Gallen, School of Finance

Abstract: We analyze different behavioral models of expectation formation in a multicountry New Keynesian currency union model. Our analyses yield the following robust results. First, economic integration is of crucial importance for the stability of the economic dynamics in a currency union. Second, when the economic dynamics are unstable, more activist monetary policy does not lead to stable economic dynamics. These findings have natural counterparts in the rational expectations version of the model: there, economic integration is crucial for the determinacy of the equilibrium and when the equilibrium is indeterminate, more activist monetary policy does not lead to a determinate equilibrium. In an application to euro area data, we find that the behavioral macroeconomic model outperforms its rational counterpart in terms of prediction performance.

Keywords: Behavioral Macroeconomics; Monetary Unions; Determinacy of Equilibria; Reinforcement Learning (search for similar items in EconPapers)
JEL-codes: D84 E52 E70 F45 (search for similar items in EconPapers)
Pages: 51 pages
Date: 2019-11
New Economics Papers: this item is included in nep-eec, nep-mac, nep-mon and nep-opm
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Citations: View citations in EconPapers (4)

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Related works:
Journal Article: The behavioral economics of currency unions: Economic integration and monetary policy (2020)
Working Paper: The behavioral economics of currency unions: Economic integration and monetary policy (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:usg:sfwpfi:2019:16

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